TSP Weekly Newsletter: 29 January 2023

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The stock funds are in rally mode with the C and S funds closing above important resistance levels this week. For the week the C fund finished up 2.47%, S fund up 3.20%, I fund up 0.83%, and F fund down 0.01%.

If you’ve been reading the Newsletters, you know that the I fund has been rallying strongly since the October low. The I fund put in a weekly buy trigger during the first week of November 2022 and hasn’t looked back. In terms of relative performance, the I fund has recovered 61.8% of its losses in this Bear Market, vs the C and S funds recovering about 45% and 30% respectively.

In this newsletter, we’ll take a look at the I fund and the price of the U.S. Dollar that drives it. While the I fund is still in rally mode, we’ll show in detail why we reallocated out of the I fund in this week’s Alert.

I Fund & the Dollar

The I fund was in a clear down trend since late 2021. A down trend, on any time frame, can be easily identified by drawing a line that connects the significant tops during that time period. In this case, the down trend line is about 1 year long. The longer the trend line is in place, and the more times it acts as resistance on rallies, the stronger the line becomes. The stronger the trend line, the more significant a break above the trend line becomes.

During the first week of November 2022, price exploded up through that down trend line! That was the beginning of a new up trend for the I fund. An up trend is identified by connecting the significant lows over a time period. Since we only have one low (December) since the October low, this trend line is very weak compared to the previous down trend line.

Trend lines are not an exact science and they need to be adjusted for price over time. “The trend is your friend” is an old Wall Street adage. As long as the trend remains intact, we should respect the trend.

The I fund is in an up trend so, where would we expect resistance and a POSSIBLE reversal of the trend? The Fibonacci retracement tool is a great resource for this. Price tends to reverse at important Fibonacci retracement levels. We can see that price has hit the 0.618 (or 61.8%) line several times in January. Right now, that price level is acting as resistance. If price breaks through this resistance line, it’s bullish. If price rolls over at this line, it’s bearish.

Given that price is over extended in the short run, a pull back at the 61.8% retracement level should come as no surprise BUT, it hasn’t happened yet…

We’ve been discussing the price of the U.S. Dollar and its effect on the I fund for the past couple of months. As the dollar declines in value relative to other currencies, the price of international companies increase because foreign currencies are getting stronger relative to the Dollar. This has nothing to do with the underlying fundamentals of international companies. It is solely based on the strength of international currencies relative to the Dollar. When the price of the Dollar goes down, the price of the I fund goes up.

Below is a weekly chart of the U.S. Dollar since its rally in 2021. It looks like an exact inverse of the I fund chart! If we apply the Fibonacci retracement tool, we see that the Dollar has declined to it’s 50% retracement level and has found support there for the past 3 weeks. 50% is not a true Fibonacci retracement level but, it is a common reversal level so is included in the retracement tool.

IF support holds at the 50% retracement level and the dollar begins to strengthen, the price of the I fund will come down. If support fails, the next resistance level is the 0.618 line (98.97) and the price of the I fund will continue higher.

The Dollar is extremely oversold in the short run. It would not be a surprise to see a recovery from these levels but, it hasn’t happened yet…

The TSP Fund Charts

Our most recent buy trigger on the C fund came during the week of 9 January. The C fund closed that week above the 20WMA, RSI was above 50, CCI above 0, and MACD was positive and rising. Because of imminent upside resistance at the down trend line, we wanted to see price close above this line before reallocating to the C fund. We got that with this week’s closing price.

The S fund also put in a buy trigger during the week of 9 January. Because the S fund had imminent upside resistance at the 1720 level, we wanted to see price close above that level before reallocating into it. We got that with Friday’s close at 1747.

The I fund buy trigger was back in early November. Since then, price has been in rally mode with only a shallow consolidation in December. The I fund is still in rally mode but, as we explained above, it is very extended in the short term. We can see this in the CCI and MACD which have been flattening out for the past 3 weeks as price continues higher.

Technically, on a weekly basis, the F fund put in a buy trigger during the first week of January but it was very weak. Price has been stuck at resistance at the 100ish level for the past couple of months while the stock funds have been rising in price. This is actually a good thing! 2022 was one of the worst Bear Markets in history because there was no where to hide. Stocks and bonds came down together.

So far in 2023, bonds have not continued to rally with stocks. If this trend continues, we have an opportunity to make significant gains in the F fund IF stocks roll over in the upcoming recession.

Bottom Line

The stock funds are in rally mode having been led by the I fund. With the I fund short term over extended, there is more upside potential in the C and S funds at this point. We need to watch the Dollar for an indication of the next direction of the I fund. If the Dollar continues to weaken, the I fund rally will continue.

From a Technical Analysis perspective, the C and S funds look very strong. Until this changes, we need to take advantage of all available gains. The macroeconomic storm clouds are gathering. Most economists believe that the world will be in recession in 2023. IF this happens, the stock funds will almost certainly roll over. We need to listen to the news but make reallocation decisions based on what’s actually happening with price.

The FOMC meets this week with a FED announcement on 1 February. The market tends to be extremely volatile in the days leading up to and immediately following a FED announcement. It could be an exciting week…

The Grow My TSP Team